A note on transition stock return behaviour

Abstract

This paper examines the relationship between expected stock returns and size, and market-to-book ratio in four transition emerging markets, namely the Czech Republic, Hungary, Poland, and Russia. Overall, we find a premium for large firms and growth stocks; factors that drive cross-sectional differences in expected transition stock returns are qualitatively different to those documented for many other emerging and developed equity markets. As our finding applies to the post-1996 period, we confirm the assertion of Black (Journal of Portfolio Management, 20, 8–18, 1993) and MacKinlay (Journal of Financial Economics, 38, 3–28, 1995) that ‘the value premium is sample-specific’. Thus, the higher average return on value stocks that has been documented for developed and emerging equity markets may not be considered as a local manifestation of a global phenomenon.

Notes

¹ It is likely that zero returns are the result of trading suspensions. Therefore, market processes no longer operate on such a security's price and are not in any way related to either of the two risk factors under consideration.

² This is the so-called look-ahead bias.

³ However, the bias is less severe when data on individual securities are used, without grouping into portfolios—as is the case in our analysis.